Why Open a Self-Directed Education Savings Account?

Education savings accounts (ESAs) are cool little tools that allow you to save and accrue tax-sheltered income for your child’s education. The benefits of a self-directed education savings account work the same way. But a self-directed account allows you to use alternative investments instead of traditional stocks, bonds, and mutual funds.

ESAs are commonly established by parents for their children. However, anyone can make contributions, including grandparents and beneficiaries of the accounts. Education Savings Account ESARegardless of who makes the contribution, there is an annual limit of $2,000 per child. However, contributions can be made until the child turns 18 years old.

The IRS requires all distributions to be taken within 30 days after the beneficiary turns 30. But, this provides adequate time for most individuals to complete their education. Funds can be for elementary, secondary, public, private, or religious educational institutions. And, they also cover qualified expenses such as uniforms, computers, and transportation to school. Children with special needs get a few exceptions, so check with your CPA to determine those.

Self-directed education savings accounts work exactly the same way.

Top 4 Benefits of a Self-Directed Education Savings Account

  • Earnings grow in the account on a tax-free basis.
  • You control your own investing decisions.
  • You can invest in real estate, private lending, oil and gas options, private equity, crowdfunding, and much more.
  • You can potentially grow wealth at a faster pace than traditional investments offer.

Contributions to an ESA are not tax deductible. However, the ability to build tax-free income in the account is incredibly beneficial in financing your child’s education. Because you get to choose your own investments, you increase the earning potential of the account and hopefully achieve the goal of providing a valuable education to your child.


This article was first published on January 18, 2017 and has been updated for accuracy.